With the changes to tax law brought on by the 2017 Tax Cuts and Jobs Act (TCJA), the IRS has revised the method an employer uses to determine how much federal income tax to withhold from an employee’s paycheck.
As part of this overhaul, the IRS released a new Form W-4 for employees to start using in 2020. The updated form:
- Works in sync with the current tax law
- Supports the new tax withholding tables
- Simplifies the process of completing Form W-4
- Improves the accuracy of tax withholdings.
Complicated worksheets are replaced with more straightforward questions to help make accurate withholding easier for your employees.
Withholding federal income taxes from household employees is optional. But it’s highly recommended so an employee’s tax liability is spread over the course of the year and not paid in one lump sum at the time they file their personal tax return.
Here’s what household employers need to know about the new Form W-4.
Besides a new look, the new Form W-4 does away with allowances. In previous years, the value of a withholding allowance was tied to the amount of the personal exemption. The TCJA eliminated personal and dependency exemptions.
In place of withholding allowances, employees can now claim dependents or other deductions. The form is broken into five steps:
- Enter Personal Information
- Multiple Jobs or Spouse Works
- Claim Dependents
- Other Adjustments (optional)
- Sign Here
Only two steps are required to be completed. In Step 1, the employee enters their personal information like name and filing status. On Step 5, they’ll sign the form. That’s it. Their withholding will be computed based on their filing status’s standard deduction and tax rates, with no other adjustments.
Your employee may want to complete steps two through four (if they apply) to get a more accurate withholding that matches their tax liability.
Employees may need more time to complete the form
If your employee’s taxes are more complicated, it could take them more time to complete the new Form W-4. They may need to provide information about their spouse’s income, dependents, tax credits, deductions they expect to claim, and other tax-related items. So don’t expect them to turn it in on their first day of work. They may need to take it home and fill it out.
Becoming familiar with the form
You may also want to review the new form before an employee needs or wants to fill one out. That way you’re familiar with the form and can help answer any questions. The IRS provides helpful FAQs on the 2020 Form W-4. To get an accurate withholding amount, your employee may want to do a “paycheck checkup” using the IRS’s Tax Withholding Estimator.
Who needs to complete the new form
Your employee provided Form W-4 prior to 2020
They are not required to furnish a new form if they’re happy with their current withholding. You’ll simply continue to withhold taxes based on their most recent Form W-4. However, any employee who wants to adjust their withholding will need to use the new Form W-4.
You can ask an employee to submit a new form but you should explain that
- they are not required to furnish a new Form W-4
- if they do not furnish a new Form W-4, withholding will continue based on their previously furnished form
Your employee gets their first paycheck in 2020
They must use the new form.
An employee is rehired 2020
Employees who previously worked for you and are rehired in 2020 will need to complete the new Form W-4.
Your employee is exempt from federal income taxes
If your employee was exempt from paying federal income taxes in 2019 and wishes to claim the exemption again in 2020, they’ll need to submit a new Form W-4 by February 17, 2020. They can claim the exemption by entering “Exempt” in the space below Line 4(c).
What does a household employer need to do
Updated income tax withholding tables
Along with a new Form W-4, the IRS revised its income tax withholding tables. The updated tables work with the new Form W-4 by removing withholding allowances.
There are two tables that go with the new Form W-4:
- Percentage Method Tables for Automated Payroll Systems
- Wage Bracket Method Tables for Manual Payroll Systems
You’ll use the wage bracket method tables if you’re manually processing your payroll.
Determining employee federal tax withholding
Download Publication 15-T Federal Income Tax Withholding Methods (PDF). Skip to the worksheet for the Wage Bracket Method.
In step one, you’ll calculate your employee’s Adjusted Wage Amount. From there, you’ll find their Tentative Withholding Amount from the table. There are two rates for each filing status: “Standard withholding” and “Form W-4, Step 2, Checkbox withholding.”
“Standard withholding” is for employees who only complete steps one and five on Form W-4. Use the “Form W-4, Step 2, Checkbox withholding” if the employee checks the box in step two for “Multiple Jobs or Spouse Works.”
Once you account for tax credits, you’ll be able to determine the amount to withhold from the employee’s wages each pay period.
For employees who submitted an earlier version of Form W-4
You’ll continue to withhold income taxes based on the tables that support earlier versions of Form W-4. These tables still include rates based on claimed withholding allowances.
Determining how to withhold state income taxes
If you live in a state with state income taxes, your employee may need to fill out a new state W-4 as well. Contact your state tax agency to see if they are using the new federal Form W-4 or have created a new state version.
Using a payroll and tax service provider
If GTM Payroll Services manages your household payroll and taxes, we’ll handle all these calculations for you and automatically withhold the correct amount from your employee’s pay. All you need to do is provide us with the updated Form W-4 (upload it to your secure, online portal) and we’ll do the rest.
Not a GTM client but like the idea of household payroll and taxes made easy? Give us a call at (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert. The IRS estimates that it takes a household employer 60 hours each year to comply with tax laws. Get that time back in your life by letting GTM manage it all for you.
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